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DSGAsia
Post Crisis Financial Regulation and
Macro Stability in Asia
Simon Ogus
Singapore Economic Policy Forum
22nd October, 2010
[email protected]; www.dsgasia.com
DSGAsia
Independent Asian Economic & Political Analysis
Deleveraging in the West is a multi-year process and there is scant evidence as
yet of credit multipliers re-starting. A square-root “recovery” seems likely
Global Nominal Money and Credit Growth
14%
14%
The Square-Root “Recovery”
% YoY 3MMA
12%
10%
12%
Private Domestic
Non-Financial Credit
10%
8%
8%
6%
6%
4%
4%
Broad Money
2%
2%
0%
0%
Global includes US, Euroland, UK & Japan
-2%
-2%
84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
DSGAsia
Independent Asian Economic & Political Analysis
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Rebalancing has been only partial. Current account dispersion remains
historically wide in the context of a deleveraging (?) world
Current Account Balances as a % of GDP
Global Cross Border Capital Requirement as a % of Global GDP
6% 12%
6%
12%
USA
Germany
China
% GDP
10%
5%
5%
Global Capital Flow
Requirement *
4%
8%
8%
6%
6%
4%
4%
3% 2%
2%
0%
0%
-2%
-2%
-4%
-4%
-6%
-6%
2%
2%
1%
10%
4%
NonIntervention
Capital
3%
Eurozone ex Germany
Japan
Asia ex Japan & China
1%
Intervention Capital = Change in Global FX Reserves
Source Data: IMF
0% -8%
0%
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-8%
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10F
* Sum of the absolute size of global current account balances
DSGAsia
Independent Asian Economic & Political Analysis
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11F
This is partly thanks to unreconstructed mercantilism. The dollar is cheap against the
majors and in line with Asia, but the real divergences remain within continents
Real Unit Labour Cost-Based Trade-Weighted Exchange Rates
Real Unit Labour Cost-Based Trade-Weighted Exchange Rates
180 180
180
January 1990 = 100
180
January 1990 = 100
160 160
160
Japan
160
Non-Germany
Euro Area
Japan
140
140 140
140
120
120 120
120
100 100
100
80
80
80
60
60
Euro Area
100
USA
80
Germany
China
60
USA, Japan and Euroland IMF Calculations;
Asia* and China DSGAsia Calculations
Asia ex China
ex Japan
60
Korea
* ULC-based where available, WPI-based otherwise
40
40
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
DSGAsia
Independent Asian Economic & Political Analysis
40
40
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
4
Japan is the champion government debtor but a unique ownership pattern
suggests that Europe is the likelier catalyst for bond market mayhem
100%
90%
80%
Government Debt as a Percentage of GDP
Asia ex-Japan*
USA**
UK
Asia ex-Japan, China & India*
Euroland
Japan (RHS)
240%
220%
Sectoral Holdings of Central Government Debt
(June 2010)
Sectoral Holdings of Central Governement Debt (Jun 2010)
200%
Central Bank
7.9%
180%
70%
160%
60%
140%
50%
General Government
11.3%
Postal Savings
20.8%
100%
80%
30%
60%
20%
0%
(of which Foreign
holdings 6.1%)
120%
40%
10%
Private Sector
39.3%
40%
* Excluding central bank paper
** USA 2008 84% of GDP if State and GSE debt is
20%
Forecasts from the IMF
Public Financial
Institutions
0.3%
Public Life Insurance
9.8%
Public Pension Funds
and CMTs
10.6%
Source: Japanese Government Flow of Funds Data
0%
A 2009 Rogoff-Reinhart study notes that if public debt exceeds 90%,
median growth rates fall by 1% and average growth rates by more
DSGAsia
Independent Asian Economic & Political Analysis
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Where was the decoupling? An early 1990s earnings trajectory seems likely
though this may not preclude market re-ratings at times of global calm
Asia ex Japan Exports & EPS Growth and the US ISM Manufacturing PMI
Asia Exports and OECD Industrial Production
40%
OECD
Industrial
Production
(RHS)
30%
12% 50%
Asia Ex-Japan
Exports (LHS)
9%
Exports USD %YoY, 3MMA, EPS
market cap/MSCI weighted %YoY
40%
65
Index 3MMA
Asia ex-Japan
Exports (LHS)
60
6%
30%
20%
0%
10%
20%
50
-3%
0%
-10%
55
3%
-6%
Asia Ex-Japan Exports
Volumes (LHS)
10%
45
0%
-9%
40
-10%
-12%
-20%
-15%
USD %YoY, 3MMA
-20%
%YoY, 3MMA
-30%
US ISM
Manufacturing
PMI (RHS)
35
Asia ex-Japan EPS
Growth (LHS)
-18% -30%
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DSGAsia
Independent Asian Economic & Political Analysis
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86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F 11F
6
Year-on-year export comparisons are easy but volume levels will tell
us whether sustainable final demand is really returning
Export Volumes
Export Volumes
300
180
270
160
240
240
140
140
210
210
120
120
180
180
100
100
150
150
80
80
120
120
60
60
90
90
40
40
60
20
300
Japan
Taiwan
270
60
Korea
China
05
180
Singapore (Non-Oil Domestic)
Thailand
160
Index 2004 = 100,
Index 2004=100, 3MMA
04
Hong Kong (Domestic)
Malaysia
06
07
08
09
10
DSGAsia
Independent Asian Economic & Political Analysis
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04
05
06
07
08
09
10
7
Real interest rates have been structurally declining and in China’s
case especially, are well below the real expected return on capital
China Real Interest Rates
Asia ex-Japan, China & India Real Interest Rates
12%
12%
12%
12%
%
9%
%
10%
10%
8%
8%
Corporate Rate
6%
9%
Corporate Rate
Mortgage Rate
6%
6%
3%
3%
0%
0%
6%
-3%
Mortgage Rate
4%
4%
2%
2%
0%
3-Month Deposit Rate
-6%
-6%
-9%
-9%
-12%
-12%
-15%
-15%
-2% -18%
-18%
0%
-2%
-3%
3-Month Deposit Rate
-21%
-4%
-4%
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
DSGAsia
Independent Asian Economic & Political Analysis
-21%
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
8
10
This all suggests that Asian property can still get a whole lot more bubbly
Ratio of House Prices to Household Disposable Income
Ratio of House Prices to Household Disposable Income
7 13
7
Australia
6
Japan
5
6
13
India (Mumbai HDFC estimates)
Taiwan
11
11
5
China (35 Major
Cities)
9
4
Korea
4
UK
3
9
7
7
5
5
3
2
2
USA
1
1
0
0
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
DSGAsia
Independent Asian Economic & Political Analysis
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3
Hong Kong
(Mass)
Singapore (HDB)
1
1
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
9
08
09
NPLs will eventually rise across the region but this should not for the most
part hinder the ability of banking systems to lend. Multipliers work out here
Loan Deposit Ratios Adjusted for Reserve and Statutory Liquidity Requirements
Net Non-Perfoming Loans as a Percentage of Total Bank Capital
270%
270% 1.5
Japan
Asia ex-Japan, China & India
240%
Asia ex-Japan
ASEAN-4
240%
210%
1.5
1.4
1.4
210%
Australia
1.3
1.3
1.2
1.2
180%
180%
150%
150%
120%
120% 1.1
90%
90%
60%
60%
30%
30%
0%
0%
Korea
1.0
-30%
1.0
Asia ex Japan
(GDP Weighted)
0.9
0.9
Asia ex Japan
0.8
(Average)
0.8
China
-30% 0.7
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
DSGAsia
Independent Asian Economic & Political Analysis
2009
1.1
0.7
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
10
Conclusions
 Real interest rates in the developed world are both too low and too high at the
same time. Too high to allow deleveraging economies to fully recover, yet too
low to encourage capital to exit and/or transfer from weak to strong hands
 In Asia, real interest rates are unequivocally too low and way below expected
rates of return on capital. Healthy financial systems are intermediating credit
to generally underleveraged consumers and corporates. Bubbles threaten
 Interest rate normalisation is being constrained by atavistic exchange rate
targeting tendencies and a valid fear of excessive capital inflows. Trade wars
and capital controls loom
 Nevertheless, with external demand likely to remain relatively constrained,
such Mercantilist tendencies need to be junked once and for all. Exchange rate
manipulation is a hard habit to break for all too many though….
 China is more able to achieve the holy trinity than most and thus it can
perhaps afford to believe that the RMB is everyone else’s problem. In the
words of Spiderman, “with great power comes great responsibility”
DSGAsia
Independent Asian Economic & Political Analysis
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